Ruskin A. Vest, Jr. v. Duncan-Williams, Inc. ( 2004 )

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
Assigned On Brief March 5, 2004
RUSKIN A. VEST, JR., ET AL. v. DUNCAN-WILLIAMS, INC.
Direct Appeal from the Circuit Court for Maury County
No. 10387 Jim T. Hamilton, Judge
No. M2003-02690-COA-R3-CV - Filed May 4, 2004
Plaintiffs sued Defendant alleging that Defendant was negligent, breached its fiduciary duty, and
committed fraud and state securities act violations in brokering the sale of municipal bonds to
plaintiffs. Defendant filed a motion to dismiss for lack of subject matter jurisdiction and improper
venue based upon an arbitration agreement Plaintiffs entered into with a third party. The trial court
denied Defendant’s motion to dismiss and Defendant appealed. After reviewing the record, we hold
that Defendant has failed to prove that it is an intended third party beneficiary of the arbitration
agreement. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Affirmed
DAVID R. FARMER , J., delivered the opinion of the court, in which W. FRANK CRAWFORD , P.J., W.S.,
and HOLLY M. KIRBY, J., joined.
Allan J. Wade and Lori Hackleman Patterson, Memphis, Tennessee, for the Appellant, Duncan-
Williams, Inc.
H. Naill Falls, Jr., Nashville, Tennessee, for the Appellees, Ruskin A. Vest, Jr. and Industrial
Products Co., Inc.
OPINION
In their complaint, Ruskin A. Vest (Mr. Vest) and the company for which Mr. Vest was
President, Industrial Products Company (IPC, or collectively with Mr. Vest as the Plaintiffs)
alleged that Defendant, Duncan-Williams, Inc. (DWI), brokered the sale of municipal bonds to
Plaintiffs. The Plaintiffs alleged that they ultimately lost the majority of their investment.
Plaintiffs filed suit, alleging DWI breached its fiduciary duty, was negligent, and committed
fraud, and state securities act violations by recommending and brokering the sale of these bonds
when DWI knew or should have known of their enormous risk.
In response, DWI filed a motion to dismiss for lack of subject matter jurisdiction and
improper venue based upon an arbitration agreement that Plaintiffs signed. In support of its
motion, DWI filed a memorandum in which DWI stated that “Plaintiffs are customers of
Defendant and have executed customer account agreements (“Account Agreement”) with
Defendant’s clearing agent BNY Clearing Services LLC [(BNY)], which governs the business
relationship between Plaintiffs and Defendant.” Attached to the memorandum was a copy of the
account agreement and an affidavit from the Senior Vice President of DWI who stated that he
was familiar with Plaintiffs’ accounts and that the attached was a true and exact copy of the
account agreement. That agreement provides in pertinent part:
This agreement . . . sets forth the terms and conditions under which [BNY] and its
subsidiaries, affiliates, agents and its and their successors and assigns will transact
business with you including, but not limited to, the maintenance of your account(s)
as introduced to BNYCS by your firm (your “Broker”). . . . Your signature on the
enclosed signature page will constitute your acceptance of and agreement to
these terms and conditions.
....
1. CLEARING ACCOUNTS
[BNY] carries your account(s) as clearing agent for your Broker. Your Broker is an
independent registered broker-dealer which has introduced your account(s) to [BNY]
as clearing agent.
....
25. WISCONSIN LAW TO GOVERN
THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE IN THE
STATE OF WISCONSIN AND SHALL BE CONSTRUED, AND THE RIGHTS
AND LIABILITIES OF THE PARTIES DETERMINED AND ENFORCED, IN
ACCORDANCE WITH THE LAW OF THE STATE OF WISCONSIN, EXCEPT
FOR WISCONSIN’S CHOICE OF LAW RULES, WHICH ARE SUPERSEDED
BY THIS PARAGRAPH.
26. ARBITRATION
ARBITRATION IS FINAL AND BINDING ON THE PARTIES THERETO.
THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT
(OTHER THAN REMEDIES IN AID OF OR IN CONNECTION WITH
ARBITRATION), INCLUDING THE RIGHT TO A JURY TRIAL.
....
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YOU AGREE, AND BY MAINTAINING AN ACCOUNT FOR YOU, [BNY]
AGREES, THAT ALL CONTROVERSIES ARISING (1) BETWEEN YOU AND
YOUR BROKER AND ITS OFFICERS OR EMPLOYEES AND/OR (2)
BETWEEN YOU AND [BNY] AND ALL PERSONS, PREDECESSORS,
SUBSIDIARIES AND AFFILIATES AND ALL RESPECTIVE SUCCESSORS,
ASSIGNS AND EMPLOYEES OF [BNY], WHETHER ARISING PRIOR TO, ON
OR SUBSEQUENT TO THE DATE HEREOF, SHALL BE DETERMINED BY
ARBITRATION.
....
27. NOTICE TO [BNY]
With the exception of the notice requirement set forth in paragraph 26 above, all
notices or other correspondence sent by you to [BNY] shall be sent directly to:
BNY Clearing Services LLC
PO Box 2034
Milwaukee, WI 53201-9450
Attached to DWI’s memorandum and the account agreement was a signature page which was
signed by Mr. Vest and stated in pertinent part:
THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION CLAUSE
SET FORTH IN PARAGRAPH 26 OF THE CUSTOMER ACCOUNT
AGREEMENT & DISCLOSURE DOCUMENT. BY MY SIGNATURE BELOW,
I ACKNOWLEDGE THAT I HAVE READ AND AGREE TO BE BOUND BY
ALL THE TERMS AND CONDITIONS OF THIS AGREEMENT AND THAT I
HAVE RECEIVED A COPY OF THIS AGREEMENT.
DWI subsequently filed with the court an identical signature page signed by Mr. Vest on behalf
of IPC. In its order on DWI’s motion to dismiss, the trial court stated “[u]pon consideration of
the briefs, affadavits, and arguments of counsel, the Court has concluded that the motion of
[DWI] should be and is hereby denied.” DWI timely filed its notice of appeal. Subsequently,
DWI filed a motion to stay discovery in the case pending resolution of this appeal. In denying in
part and granting in part DWI’s motion to stay discovery, the trial court stated that “[t]he Court
finds that, in the interest of justice, discovery may proceed during [DWI’s] appeal, but only to the
extent that it would be permitted in arbitration.” DWI filed a subsequent motion to stay
discovery pending appeal with this Court which we denied.
Issue Presented
DWI appeals and presents the following issue, as we perceive it, for our review:
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Whether the trial court erred in denying DWI’s motion to dismiss this
action or compel arbitration based upon the arbitration agreement.
Standard of Review
An agreement to “‘arbitrat[e] is a matter of contract.’” Frizzell Constr. Co. v. Gatlinburg,
L.L.C., 9 S.W.3d 79, 84 (Tenn. 1999) (quoting AT&T Techs., Inc. v. Communications Workers of
Am., 475 U.S. 643, 648 (1986)). “The interpretation of a contract is a matter of law that requires
a de novo review on appeal.” Guiliano v. Cleo, Inc., 995 S.W.2d 88, 95 (Tenn. 1999) (citing
Hamblen County v. City of Morristown, 656 S.W.2d 331, 335-36 (Tenn. 1983)).
Third Party Beneficiary
As an initial matter, we must determine whether to apply the customer service
agreement’s Wisconsin choice of law provision. “‘Tennessee will honor a choice of law clause if
the state whose law is chosen bears a reasonable relation to the transaction and absent a violation
of the forum state’s public policy.’” Wright v. Rains, 106 S.W.3d 678, 681 (Tenn. Ct. App.
2003) (quoting Bright v. Spaghetti Warehouse, Inc., No. 03A01-9708-CV-00377, 1998 WL
205757, at *5 (Tenn. Ct. App. Apr. 29, 1998)(no perm. app. filed)). In this case, we find that
Wisconsin bears a reasonable relation to the transaction because BNY is a Wisconsin corporation
whose Wisconsin’s address appears in paragraph twenty-seven of the account agreement. See id.
Under Wisconsin law, a party attempting to enforce provisions of a contract bears the
burden of proving the elements of a contract. See In re Spengler, 596 N.W.2d 818, 825 (Wis. Ct.
App. 1999). In this case, DWI is seeking to enforce the arbitration provision of BNY’s account
agreement as a third party beneficiary. Wisconsin law is clear that a third party may enforce the
provisions of a contract “[i]f a contract is entered into ‘directly and primarily’ for the benefit of
third parties.” State ex rel. Journal/Sentinel, Inc. v. Pleva, 445 N.W.2d 689, 692 (Wis. Ct. App.
1989) (citing Winnebago Homes, Inc. v. Sheldon, 139 N.W.2d 606, 609 (Wis. 1966)). In this
case, while the arbitration agreement provides that “YOU AGREE, AND BY MAINTAINING
AN ACCOUNT FOR YOU, [BNY] AGREES, THAT ALL CONTROVERSIES ARISING (1)
BETWEEN YOU AND YOUR BROKER . . . SHALL BE DETERMINED BY
ARBITRATION,” the record contains no evidence, other than the arbitration agreement’s
boilerplate language, that Plaintiffs and BNY entered into the account agreement “directly and
primarily” for the benefit of Plaintiff’s broker, DWI. Id.
While we have found no Wisconsin law on point with the facts of this case, federal courts
have applied a similar intended third party beneficiary analysis as Wisconsin courts in
determining whether an introductory broker is a third party beneficiary of an arbitration
agreement entered into by a clearing broker and customer. Compare Sheldon, 139 N.W.2d at
609, Elec. Appliance Co., v. United States Fid. & Guar. Co., 85 N.W. 648, 650 (Wis. 1901), and
Pleva, 445 N.W.2d at 692 with Whisler v. H.J. Meyers & Co., 948 F. Supp. 798, 801 (N.D. Ill.
1996) and Ziegler v. Whale Sec. Co., 786 F. Supp. 739, 742-43 (N.D. Ind. 1992). In Ziegler, the
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customer and clearing broker entered into an arbitration agreement which provided that “[t]he . . .
arbitration provision[] shall be applicable to all matters between such other broker-dealer and
me.” Zeigler, 786 F. Supp. at 741. In determining whether the customer’s introducing broker
could enforce that clause as an intended third party beneficiary, the court looked to the
contracting parties understanding of the three-party relationship. Id. at 742-43. The court found
three documents as proof of the contracting parties’ understanding of the relationship in
determining that the introducing broker was a third party beneficiary. Id. at 743. In addition to
the arbitration agreement itself which did not refer to the specific name of the introductory
broker, the court relied upon two other documents which specifically named and outlined the
nature of the relationship. See id. The court held that “[w]hile it is true that some courts will not
find one to be a third-party beneficiary absent specific reference to such party in the arbitration
clause or agreement in question, . . . this Court finds that under these circumstances, the
[introductory broker] need not be specifically named in the arbitration clause.” Id. (emphasis
added).
In this case, the arbitration provision does not specifically name DWI as the broker and
the only piece of evidence on which DWI can rely as proof of the contracting parties
understanding of the three party relationship is that contained in DWI’s memorandum in support
of its motion to dismiss. The memorandum provides that “Plaintiffs are customers of [DWI] and
have executed customer account agreements (“Account Agreement”) with Defendant’s clearing
agent BNY Clearing Services LLC, which governs the business relationship between Plaintiffs
and [DWI].” This, without further proof, does not show the contracting parties’, Plaintiffs’ and
BNY’s, understanding of the relationship for this Court to determine that Plaintiffs and BNY
intended DWI to be a third party beneficiary. Accordingly, we affirm the decision of the trial
court to deny DWI’s motion to dismiss.
Conclusion
In light of the foregoing, we affirm the decision of the trial court to deny DWI’s motion to
dismiss. Costs of this appeal are taxed to the Appellant, Duncan-Williams, Inc., and its surety,
for which execution may issue if necessary.
___________________________________
DAVID R. FARMER, JUDGE
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